The Evidence is In: Patent Trolls Do Hurt Innovation

The Evidence is In: Patent Trolls Do Hurt Innovation

Research shows that patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs; in aggregate, patent litigation destroys over $60 billion in firm wealth each year. While mean damages in a patent lawsuit ran around $50,000 (in today’s dollars) at the time the telegraph, mean damages today run about $21 million. Even taking into account the much larger size of the economy today, the economic impact of patent litigation today is an order of magnitude larger than it was in the age of the telegraph.
Moreover, these costs fall disproportionately on innovative firms: the more R&D a firm performs, the more likely it is to be sued for patent infringement, all else equal. And, although this fact alone does not prove that this litigation reduces firms’ innovation, other evidence suggests that this is exactly what happens. A researcher at MIT found, for example, that medical imaging businesses sued by a patent troll reduced revenues and innovations relative to comparable companies that were not sued. But the biggest impact is on small startup firms — contrary to Haber and Levine, most patent trolls target firms selling less than $100 million a year. One survey of software startups found that 41% reported “significant operational impacts” from patent troll lawsuits, causing them to exit business lines or change strategy. Another survey of venture capitalists found that 74% had companies that experienced “significant impacts” from patent demands.
Three recent econometric studies confirm these negative effects. Catherine Tucker of MIT analyzed venture capital investing relative to patent lawsuits in different industries and different regions of the country. Controlling for the influence of other factors, she estimates that lawsuits from frequent litigators (largely patent trolls) were responsible for a decline of $22 billion in venture investing over a five-year period. That represents a 14% decline.

James Bessen

Harvard Business Review

November 2014

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