Patent Trolls or Tech Fairy Godmothers?

Software patent lawsuits reveal their true natures


Patents are supposed to encourage innovation. But a new study shows that when it comes to information technologies, litigation—abetted by dysfunctional aspects of the patent system—is slowing rather than enhancing inventiveness.

Boston University legal scholars James Bessen, Jennifer Ford, and Michael Meurer focus in their article in the current issue of Regulation, "The Private and Social Costs of Patent Trolls," [PDF] on "non-practicing entities" (NPEs) that buy up dubious "vaguely worded patents" that can be interpreted as covering established technologies. They then "use them opportunistically to extract licensing fees from the real innovators." Critics liken NPEs to mythical trolls that lurk under bridges built by others demanding tolls from travelers.

The recent bidding wars for patent portfolios held by ailing tech companies are a good indication of just how dysfunctional the information technology patent mess has become. For example, Kodak, the bankrupt photo film company, is now suing Samsung, Apple Computers, and HTC for allegedly infringing its digital photography patents. The floundering Kodak is pursuing these patent lawsuits in the hope of shoring up its patent portfolio with the aim of selling it for up to $2.6 billion.

Kodak is following the path of bankrupt telephone manufacturer Nortel Networks, which auctioned its portfolio of 6,000 patents in June 2011 to a consortium including Microsoft and Apple for $4.5 billion. Last summer, search giant Google spent $12.5 billion purchasing Motorola Mobility chiefly to obtain its portfolio of 25,000 patents. As a platform to bolster innovation? Hardly. As Google CEO Larry Page explained, "Our acquisition of Motorola will increase competition by strengthening Google's patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies."

Note that Page said that Google needed the Motorola's patents, not its inventions. Why? To defend against its competitors' patent lawsuits. In other words, these tech titans are wielding patent portfolios in a legal game of reciprocal deterrence not too unlike the old nuclear standoff of mutually assured destruction between the U.S. and the Soviet Union, and it's just about as economically productive.

In their research, Bessen and his colleagues focus on a segment of the software and related patents muddle, the patent lawsuits filed by NPEs. The researchers find that NPE lawsuits "are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010." And the losses from this sector of the patent wars are intensifying: The last four year have seen average lost wealth of more than $80 billion annually. The majority of NPE patent litigation involves software and related technologies. 

The Boston University researchers calculate patent litigation losses by looking at how the more than 4,000 lawsuits filed against publicly traded firms affected their stock prices and their research and development efforts over the short and the long run. The researchers report that business divisions of companies affected by the lawsuits typically saw their revenues decline by a third and that they delayed releasing new products for two years as the lawsuits hung fire.

The lawsuits do not simply transfer wealth between the defendant firms and NPEs and the inventors whose patents they hold. Looking at the losses incurred by patent defendants from the nearly 600 lawsuits filed by publicly listed NPEs, the scholars find that the defendant companies lost nearly $88 billion in wealth between 2000 and 2010. On the other hand, the NPEs gained only about $8 billion from the lawsuits and resulting licensing fees, of which $1.7 billion was paid to independent inventors whose patents were the bases of the NPE lawsuits. As a consequence, this litigation resulted in an overall loss to the economy of $80 billion with precious little money actually paid to independent inventors.

Nathan Myhrvold, head of the prominent NPE Intellectual Ventures, rejects this harsh characterization of his industry. His company, asserts Myhrvold, "is misunderstood. We have been reviled as a patent troll—a renegade outfit that buys up patents and then uses them to hold up innocent companies." Instead, Myhrvold insists that by buying up patents his company is trying to "create a capital market for inventions" which will "turbo-charge technological progress, create many more new businesses, and change the world for the better." In other words, Myhrvold argues that he and his ilk function much more like beneficent fairy godmothers than trolls.

Bessen and his colleagues find little evidence to support this fairy godmother interpretation of the role of NPEs. They cogently point out that since NPEs generally sue after defendant firms are already using a technology, what is chiefly transferred between defendants and NPEs is not technology, but money. The patents deployed in the lawsuits cover technologies that have likely been developed independently by a number of companies. Imagine Cinderella figured out for herself how to turn a pumpkin into a coach, only to be confronted at midnight by a fairy godmother demanding a fee for the unauthorized use of pumpkin transformation spells.

Instead of a capital market for inventions, information technology companies in the U.S. find themselves enmeshed in a growing capital market for litigation. The result is reduced incentives to innovate, slower introduction of new advanced products to consumers, and reduced earnings for shareholders.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

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  1. Stop. Who would cross the Bridge of Death must answer me these questions three, ere the other side he see.

    1. “You mean behind the rabbit?”
      “It IS the rabbit!”

  2. Patents are supposed to encourage innovation.

    Yes, just ask Charles Goodyear… Or E. H. Armstrong.

    But a new study shows that when it comes to information technologies, litigation?abetted by dysfunctional aspects of the patent system?is slowing rather than enhancing inventiveness.

    Sorry, Bailey, but that is true for any and all sorts of technologies and processes. Patents tend to hinder rather than spur innovation. It is competition which accelerates innovation, not some government-granted monopoly – just ask Vanderbilt. Or Lysander Spooner.

    1. Look at the Wright Brothers for a great example. They made genuine advances in powered controlled flight, then sat on their duffs and only flew for those making deposits to buy, and spent the rest of their flying career in suing over ailerons vs wing warping patents, which was only settled when the US Govt stomped on both of them so they could buy airplanes for WW I. Meanwhile Curtis and everyone else, Europeans included, kept on experimenting and advancing the tech.

  3. this litigation resulted in an overall loss to the economy of $80 billion with precious little money actually paid to independent inventors.

    I’m having a sort of Stephan Kinsella-induced deja vu.

    1. I had honestly never given a second thought to the entire enterprise of IP until I started reading Kinsella’s work at the LVMI, but his conclusions are almost inescapable.

  4. just a reminder…intellectual property is a bullshit concept

    1. “Look! He put an exact same wind vane as I have! Ah, the thief!!!!”
      “But… you still have your own wind vane in your roof, Horace!”
      “No matter! He stole MY idea!!!!”

    2. OM & SIP: Between people dealing with the physical sciences, e.g, biology and chemistry and people in infotech there is something of a difference of opinion on the question of whether or nor patents help or harm innovation.
      See my 2007 column, The Tragedy of the AntiCommons.

      1. this is probably a dumb question, but are you familiar with Kinsella’s work, Ronald?

        1. Stop IP|1.24.12 @ 5:19PM|#
          this is probably a dumb question, but are you familiar with Kinsella’s work, Ronald?

          meh, Field of Dreams was a bit syrupy for me.

        2. You do realize that there is more to the field than just Kinsella?

      2. The problem with the idea that the patent system “helps” innovation is that it does so by government picking winners and losers.

        In the case of patents, government decides the “winner” is the one who first patents a concept, then grants him a monopoly privilege on any implementation of that concept throughout the life of the patent. This is in contrast to the market deciding the winner as the one who most successfully uses a concept.

        1. M’hm. If people want to protect their ideas they should use their own guns, or ESP as the case may be.

  5. Software patents are pretty ridiculous from the get-go. There are generally a pretty set number of things people want software to do; let’s list some simple ones, like: play video, word process, browse the web.

    There are so many ways to code an application to do this, so how do you patent anything? As we can see, you can’t; there are many browsers, word processing programs, and video players out there. So what exactly are they patenting? Video codecs? User interfaces?

    1. I have 14 patents. They all include at least one claim on a method to perform a task (which in the real world turns into sofware). There are many fields which are still solving problems for the first time (some of those fields involve systems and software that result in deaths when they fail), so yes there are reasons to patent software.

      The patent trolls generally don’t care about these software patents because they are targeted at niche markets that have a limited number of sellers competing for a not-so-big number of customers.

      Patent trolls tend to chase after software applications which have broad applications in commercial markets where the pay-off can be really big (a few pennies each on a million units sold or a billion units sold adds up to big numbers). This is also the market that tends to produce the “dumb” patents that people complain about (e.g., amazon’s one-click patent).

      1. But that’s sort of my point; how do you patent clicking once? Are they patenting the method by which they process your order in one click (by which I mean the code), or the act of processing your order in one click?

        Because software is about getting some sort of work done. There is the work you want done, but there are many ways, languages, and methods for doing it. So what are you patenting? Can you explain one of your patents, and what you actually patented (method or work done)?

        1. I have not read the one-click patent, but I have never seen a patent on “software” per se. You can claim apartus, systems, methods, modules, and a few other items.

          So a method patent covers the sequence of actions that have to take place to accomplish a major goal. The text of the application will say that the method may be embodied in software, but the claim will only be for the method.

          The one-click patent must cover the “automation” behind the scenes to conclude a transaction based upon prior knowledge of the user (through cookies perhaps) and the single action of the buyer.

          My guess is that Amazon’s patent is crap and never should have been issued.

        2. Here are the highlights of the “one-click” patent:

          United States Patent 5,960,411
          Hartman , et al. September 28, 1999

          Method and system for placing a purchase order via a communications network


          A method and system for placing an order to purchase an item via the Internet. The order is placed by a purchaser at a client system and received by a server system. The server system receives purchaser information including identification of the purchaser, payment information, and shipment information from the client system. The server system then assigns a client identifier to the client system and associates the assigned client identifier with the received purchaser information. The server system sends to the client system the assigned client identifier and an HTML document identifying the item and including an order button. The client system receives and stores the assigned client identifier and receives and displays the HTML document. In response to the selection of the order button, the client system sends to the server system a request to purchase the identified item. The server system receives the request and combines the purchaser information associated with the client identifier of the client system to generate an order to purchase the item in accordance with the billing and shipment information whereby the purchaser effects the ordering of the product by selection of the order button.


          1. A method of placing an order for an item comprising:

          under control of a client system,

          displaying information identifying the item; and

          in response to only a single action being performed, sending a request to order the item along with an identifier of a purchaser of the item to a server system;

          under control of a single-action ordering component of the server system,

          receiving the request;

          retrieving additional information previously stored for the purchaser identified by the identifier in the received request; and

          generating an order to purchase the requested item for the purchaser identified by the identifier in the received request using the retrieved additional information; and

          fulfilling the generated order to complete purchase of the item

          whereby the item is ordered without using a shopping cart ordering model.

          1. It’s as ridiculously vague as I thought it would be. How absurd.

        3. One problem is that, over time, method can become act. For whoever first thought of using a mouse and clicking it was a method, but as it becomes generalized it’s an act. There has been lively discussion on patents for user interfaces that points out that what seems obvious in the present (and thus a simple act) had to be developed laboriously as a method at first.

          So we end up with patents that look like they should be invalid for their obviousness and that they address an act but which in the context of their time were far from obvious and which did address a method at that time

          The shift often happens now within a matter of months though (far quicker than the time it takes to grant the patent), so you end up with patents on things that are over-broad because they’ve simply been innovated past in the interim.

          Combine that with the fact that patents are absolute licenses (rather than the protection accomplished through keeping trade secrets secret to keep your specific instance of an invention from being used) and thus do not allow for independent invention, and you have a mess for everyone.

          1. I demand my monopoly license on a method of thinking about patents on a recorded medium, where it becomes stunningly obvious we should get rid of patents.

      2. Why is the food we eat not all bland?
        Why is the food we eat not all grand?
        Are there no ideas, no innovation, no experimentation, and no creation in this thriving industry? How is it that not every restaurant is not operating exactly like McDonalds? How do the innovators get jobs? Tell me, how much flavor would patents add to the food industry?

      3. The research all stopped when PhD students found out they couldn’t patent things like math. I can’t wait until someone patents the next form of calculus because it’s only useful with software.

        1. Crazed researcher discovers new form of mathematics showing P=NP, and patents the innovation. Crazed researcher auctions off exclusive first year of use to Apple for 50 billion in cash and stock.

  6. Is NPE trolling a problem for drug manufacturers? There’s big money in drugs but I don’t hear about that sector as much (at all?) as Silicon Valley.

  7. RB: See my response above on this question.

    1. So only 5-6 real world examples of trolls in bio/chem realm and the general concensus is that patents don’t harm innovation in America.

      I’ve yet to find a clear comparison of continental Europe pre-1978 (when drug patents were introduced) to US over that same period which was drug patent from day 1. I’ve read where new chemical entities (NCEs) took a hit once patents were allowed on the drugs themselves from the previous law of just patenting the process. The theory being that innovations in medicine build on previous success. But the citation was no longer available via lazy Google search.

  8. on “non-practicing entities” (NPEs) that buy up dubious “vaguely worded patents” that can be interpreted as covering established technologies.

    Patent trolls are the modern day equivalent of ambulance chasers. They exploit protections that were put into the law for generally sound reasons.

    The two fundamemtal problems are:

    “vaguely worded patents” which is the result of failures at the patent office;

    “that can be interpreted as covering established technologies” which only works because technically illiterate juries are clueless about how technology works.

    While there are many strong libertarian arguments against any form of IP protection, patent trolls are a problem of implementation not philosophy.

    1. Correct. I am a patent examiner. Patent trolls are an inevitable result of poor practice at the PTO. The PTO creates loopholes by issuing patents of questionable validity; so-called trolls exploit the loopholes by waving patents at deep-pocketed corporations, knowing that the corporations would rather settle than go through an extremely expensive discovery process. The trolls are the symptom, not the disease. The disease is (1) invalid patents issuing from PTO (2) high cost of litigating against invalid patents, once issued (3) low pleading standard for infringement suits that enables corporations to be threatened with high discovery costs.

      1. The you Patent Examiner.

      2. And the real beauty is that poor practice is now standard practice. And a horde of attorneys standing guard at the door lest any reform get snuck in and interfer with their gravy train.

  9. The NPR show “This American Life” did an episode about patent trolls a while back that actually was very good.

    Let me look for it.

    OK, here it is.

  10. Patents are supposed to encourage innovation

    Nope. They’re supposed to protect property. “Encouraging” innovation is not the government’s role or prerogative.

    1. To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

      so the motivation is pretty clear : innovation.

      And the only way they can do that is by denying people the right to use their own property. So you are wrong.

      1. Useful Arts – that should’ve eliminated copyright on 99% of everything ever protected by it.

        Not to mention the dilation of “limited” Time.

      2. Cracker, that’s only in America. Elsewhere, there just blatant grabs at preventing other people from competing or re-innovating the same damn thing.

    2. Patents and copyrights aren’t really “property” as we know it. Property doesn’t have an expiration date whereby it no longer exists in the public domain.

      The Sonny Bono copyright extension act funded by Disney ensured that children today still have pay 10 bucks to watch 80 year old cartoons. It did not generate any value for consumers. This is an example of government acting to help certain corporations at the expense of the masses and, ironically, a great example of how big government often acts against consumers rather than protecting them.

      Libertarians: gotta love ’em. Defending big corporations getting away with infringing upon public domain rights and then turning around and welcoming illegal immigrants trashing the rights of citizens. Anarchists are more reasonable.

  11. Patent troll?

    You mean like White Indian/rather?

  12. The comment about the fairy godmother suing Cinderella for Patent infringement just made me think of what Harry Potter would be like if you could patent magic spells. It would assuredly be a whole lot less magical

  13. Watt’s steam engine patents
    Wright Bros’ aviation patents
    Patents basically set back steam for a generation and the Wright Bros after their initial success spent all their time suing people.
    Patents just reward people who fill out the forms first.

    1. Didn’t see your comment before I posted my own. The Wrights are my favorite example of patents gone wrong. Even the most die hard IP proponent has a hard time making sense of that bizarreness.

  14. The author compares the current buy-up of software-patent portfolios by technology giants to Cold War US v. USSR “mutual assured destruction”– reciprocal deterrence against patent lawsuits.

    That described the situation ten years ago, when technology giants quietly patented their own software. In more recent years, however, as some of those giants have felt economic pressure, it is as if, with the Soviet collapse in 1991, the Soviet nuclear arsenal had been auctioned off to terrorists. The major difference is that the US Congress can legislate the patent-troll nukes out of existence.

  15. “All your source code are belong to us.” What do I get paid? You get paid to be happy knowing you’re driving innovation. Yeah, I’m real sure we would have Windows today if Microsoft knew for a fact that every software engineer could mooch off them.

    I wish I understood why libertarians hate intellectual property so much. You guys seem like the Marxists of the information age using all the same arguments why intellectual property must be in the commons that Marxists would use to argue that tangible property be in the commons.

    The truth is that nobody but a sucker works only for the good of others and a person is no more going to create intellectual property for the commons without reward than he will operate a plow for the commons without reward. And in a world beyond the plow and the mud hut intellectual property is certainly more important then you portray it.

    I sometimes get the feeling that libertarians believe free market means a market free of charge.

    1. Not every libertarian hates IP law. I don’t see anything wrong with it. The point of the article is that in its current state it is being abused.

      I suppose this makes me a “little l” libertarian. I also don’t agree with the big L stand on open borders. Libertarianism is a big tent and to call out all libertarians seems kind of silly.

      1. It sure is a big tent, and wherever I go inside the big tent everybody hates IP rights. If you’re a one off fluke then good for you.

        All I can say is that if I had a choice between working to “drive innovation” and working to earn an income I would choose the same path as I would if given the choice between working for “the public good” and working to earn an income.

        I work for myself thank you very much, not to “drive innovation”.

        1. In the software world, “innovation” is just another gear in the cogs. All software juggernauts are all running on the free cogs, even Microsoft. IIS is more like crappy wallpaper on top of Apache, who Microsoft loves to donate to. Apple is more like fancy tiling on top of BSD. Google is busy running linux, defending their IP with trade secrets. IBM and AT&T already are running mostly on open source systems. Oracle, well, they’re in denial about their most valuable assets after purchasing SUN, and they certainly don’t like that open source Android. You could take a look at what VMWare or SAP build their systems from… From the market studies I’ve read, the software market consists mostly of small developer teams who work like artisans. Somehow, it seems they’re all at least built on top of open source. If you are above slightly average intelligence and work in the industry, you’re completely capable of coming up with ideas that are already patented in multiple ways, making your otherwise competitive ideas a liability. The point of the matter is, the people making all this “free” stuff are making a ton of money. Big, shitty companies are the only ones that sort of need the government to protect them from the pirates, and the big shitty companies are completely reliant on the tit of the artisans, because they have the better business model. Just because, that’s the way you’ve always done it, doesn’t mean that it’s not mindbogglingly stupid.

    2. Who said anything about putting stuff in a commons? We are not socialist Stallmanistas. If you don’t want to share your information, then don’t share your information. Or share it under the terms of a contract. Or whatever. But don’t just sit it on a store shelf and then pretend that the guy who bought it doesn’t now own it.

  16. Don’t forget the effect of Bilski and a host of recent Fed. Cir. decisions. The Supreme Court has been basically begging Congress to step in and fix matters for years. Which the “America Invents Act” did NOT do. Those of us in patent law have joked it should have been better called “The Full-Employment Patent Litigation Attorneys’ Act.”

  17. A patent license is conceived to defend your proprietary design from being copied by others. It also supplies you the proficiency to identify your merchandise or method as a secure asset.
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