“Patent Trolls” Cost Productive Companies $29 Billion in 2011, Stall Innovation, and Hurt Small Businesses
Washington, D.C. – “Patent Trolls” cost the American economy $29 billion in 2011, not including the indirect costs to the defendant’s business such as diversion of resources, delays in new products and loss of market share, according to a study released today by James Bessen and Michael Meurer of the Boston University School of Law.[i]
The study, titled “The Direct Costs from NPE Disputes,” found that NPE litigation is growing rapidly, and affected 5,842 defendants in 2011. Building on the research of their 2011 study, “The Private and Social Costs of Patent Trolls,” the study released today estimates the direct cost portion of total costs using survey data gathered directly from defendants, and provides information on companies not publicly listed, including small companies.
The direct costs of NPEs are large relative to total business spending on research and development, which totaled $247 billion in 2009 (NSF 2012), implying that NPE patent assertions effectively impose a significant tax on investment in innovation. There is little evidence to suggest that NPEs promote invention overall. The costs to defendants in NPE suits, most of whom invest heavily in R&D, are much larger than the possible flows to small inventors. Publicly-traded NPEs cost small- and medium-sized firms more money than these NPEs could possibly transfer to small inventors. NPE assertions reduce the amount that both small and large firms have available to invest in innovation.
“The patent system still needs significant reform to make it a truly effective system for promoting innovation,” the authors conclude. To counter the rapid growth and high cost of NPE litigation, the patent system should improve notice, including more rigorous enforcement of the claim definiteness standard. Greater transparency and more accurate damages calculations are also needed. To deter frivolous lawsuits, the study recommends improving the system through greater use of fee-shifting to losing litigants in patent cases and more stringent pleading requirements.
The authors also highlight key findings illustrating the disproportionate burden of NPEs on small- and medium-sized companies:
- Much of the NPE dispute burden falls on small- and medium-sized companies. Eighty-two percent (82%) of the defendants had less than $100 million in revenue, and these accounted for 50 percent of the defendants. As a fraction of revenues, the direct costs of NPE patent assertions are relatively larger for small companies.
- Small and medium-sized companies account for 90 percent of the defendant companies, 59 percent of the lawsuit defenses and 37 percent of the accrued direct costs.
The study’s results are especially timely as the U.S. Government and Accountability Office (GAO) prepares to submit to Congress its study of the consequences of patent litigation by NPEs. The study, mandated by the America Invents Act, is due September 16, 2012, and will address the impact of litigation on the duration of patent claims, the costs of such litigation, and the economic impact on the U.S. economy and job creation. The GAO study must also include recommendations to minimize the negative impact of such patent litigation.
The Coalition for Patent Fairness is a diverse group of companies and industry associations dedicated to enhancing U.S. innovation, job creation, and competitiveness in the global market by modernizing and strengthening our nation’s patent system. Coalition for Patent Fairness members include: Cisco, Dell, Google, Intel, Oracle, RIM, SAP, Symantec, and Verizon Communications.
The study was based on a survey of NPE-related costs performed by RPX Corporation, a patent risk-management company.
RPX Corporation (NASDAQ: RPXC) is a leading provider of patent risk solutions, offering defensive buying, acquisition syndication, patent intelligence and advisory services. Since its founding in 2008, RPX has introduced efficiency to the patent market by providing a rational alternative to litigation. The San Francisco-based company’s pioneering approach combines principal capital, deep patent expertise, and client contributions to generate enhanced patent buying power. By acquiring patents, RPX helps to mitigate and manage patent risk for its growing client network.
 The authors defined direct costs to include the cost of outside legal services, licenses fees, and other direct costs incurred in response to NPE litigation risk. Indirect costs included the opportunity costs of the effort exerted by legal, managerial, engineering, and scientific personnel inside the firm, and other business disruption costs such as loss of goodwill, loss of market share, or disruption of innovative activities.
Contact: Mollie O’Dell, Mollie.ODell@StoryPartnersDC.com