Shut Down the Patent Trolls
Given such high-profile cases as the Apple-Samsung battle or the Zenimax lawsuit against virtual-reality company Oculus, it might appear tech companies sue each other over intellectual property all the time. They don't. Most such litigation is initiated by patent trolls, whose sole purpose is to litigate against people who do more productive things.
This is an $80 billion-a-year problem, according to a 2011 Boston University study, and the way to solve it is to ban corporations from owning patents or anyone from trading in them. If that sounds extreme, bear with me.
California-based legal analysis firm Lex Machina says 6,092 patent cases were filed in the U.S. last year; the 10 most prolific plaintiffs were all "patent monetization entities" (read: shell companies that are trolls). The defendants were companies such as Apple Inc., Amazon.com Inc., AT&T Inc. and Google Inc. The latter's top lawyer, Eric Schulman, says more than 60 percent of patent legislation in 2012 was started by trolls, compared with 20 percent in 2006. A 2013 report from the Executive Office of the President said 100,000 companies were threatened with patent infringement lawsuits in 2012 alone.
To companies with real business to conduct, patent litigation is a hassle with uncertain results. Lex Machina says damages were awarded in only 708, or 1.9 percent, of the 36,629 patent cases that courts considered between 2000 and 2013. And at about $400,000, the median compensation awarded was "far less than the typical cost of litigating a patent case to a verdict."
This is where the professionals come in: By specializing and filing cases in bulk, they cut costs and increase the probability of finding companies that will settle to avoid litigation.
The emergence of this market has been good for companies that no longer need all of their patents, because trolls are happy to buy them so they can sue for alleged infringements. Panasonic Corp., Hewlett-Packard Co. and Ericsson AB sold off more than 5,000 patents in the first quarter of this year, according to Texas patent intelligence firm Innography. Nokia Networks, too, has been getting rid of part of its patent portfolio: It recently announced the sale of a number of patents to licensing firm WiLAN, which is known for its legal war with Apple and not much else.
In April, Apple, Adobe Systems Inc., Google, Facebook Inc. and scores of others signed a letter to Senators Patrick Leahy and Charles Grassley, urging them to make it more difficult for trolls to carpet-bomb companies with poorly substantiated patent lawsuits. Leahy replied in a statement, saying he had been working on anti-troll legislation for a year but had to give up because the bill "would have severe unintended consequences on legitimate patent holders who employ thousands of Americans."
Leahy had a point. Since about one-third of the patent lawsuits are filed by genuine companies, it is unfair on them to make it more difficult to seek redress and raise their legal costs just to hurt trolls that abuse the system.
Yet something needs to be done, and all the potential solutions seem radical. New Zealand, for example, banned software patents altogether last year, deciding there was no way to develop new software without infringing on hundreds of thousands of existing patents. I'm not sure the U.S. software giants would be happy with that idea.
A better route would be to ban the sale of patents and allow only private individuals to hold them. Inventors working on corporate time or with corporate funding could be contractually bound to license their work to companies at nominal or zero cost. If an inventor or her employer wanted to sell an idea rather than develop it, they still could -- by licensing the patent on an exclusive basis, much as an author licenses book rights to a publisher. The troll corporations, meanwhile, would have to fold.
No doubt the lawyers who often stand behind the trolls would still try to persuade individual inventors to sue with the promise of billion-dollar verdicts, but that decision would be up to the inventors. There would still be frivolous claims, but the cost of such trolling to legitimate companies would decline.
Intellectual property is not the same as other kinds. It is developed by real people, even when they work within corporations. A market in creative ideas in which the creators play no role will always give rise to abuse.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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