How to Slay the Patent Trolls

In a recent episode of HBO’s sitcom “Silicon Valley,” a lawyer tries to extort money from a struggling startup by threatening to sue it for patent infringement. The troll, who understands nothing about the underlying technology, owns a patent so broad as to be unenforceable, but knows that the victims of his perfectly legal extortion scheme lack the financial resources to fight him in court.

A recent research paper by economists Ian Appel, Joan Farre-Mensa and Elena Simintzi shows that the show’s humorous scenario isn't that far from real life. Appel et al. note that patent infringement lawsuits have increased by a factor of 10 since 2000, and that so-called non-practicing entities -- basically, companies that own patents but don’t use them to produce anything -- account for more than two-thirds of the increase. The cases that go to court obviously represent just a fraction of the times that NPEs put pressure on tech companies -- their more typical mode of operation is to send threatening letters. Small businesses are the most common targets. Most of the time, companies cough up the cash, viewing the trolls as merely one more cost of doing business.