Do Patent Trolls Exist? Two Studies Reach Different Conclusions (Part 2) 18/12/2018 by Steven Seidenberg for Intellectual Property Watch 2 Comments Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 20 years. He is based in the greater New York City area and may be reached at firstname.lastname@example.org. Two recent academic papers examine whether Non-Practicing Entities (NPEs) deserve their reputation as patent trolls – but the papers reach conflicting conclusions. As discussed in the first part of this article, a paper published by Stanford’s Hoover Institution found that 26 publicly-listed NPEs invest in R&D and do little harm to America’s high tech sector. These findings, however, are less significant than they appear. Another paper, published by Harvard Business School (HBS), found that NPEs do on average behave as patent trolls. How important – and trustworthy – are the HBS findings? Harvard Business School in winter The latest version of the HBS working paper was released on 21 June by Professors Lauren Cohen of Harvard Business School, Umit G. Gurun of University of Texas at Dallas, and Scott D. Kominers of Harvard University. The paper examined the complete universe of NPE lawsuits from 2005 to 2015 and combined this with data on publicly traded firms involved in NPE litigation. The study did not examine demand letters and other informal assertions by NPEs, thus omitting many economically small NPE assertions of infringement. This study of litigation activity found that “on average, NPEs appear to behave as opportunistic ‘patent trolls.’” The paper based this conclusion on a number of factors. First, the paper found that NPEs tend to sue firms flush with cash or which just had positive cash shocks. This suggests that NPEs are simply attempting to shake down cash-rich defendants. Alternative Explanations Of course, there could be an innocent explanation for NPEs targeting cash-rich defendants. NPEs may simply be going after those firms that profitably infringe the NPEs’ patents. The HBS paper undercuts this explanation, however, by finding that “cash holdings in unrelated business segments are almost as predictive of NPE litigation as are cash holdings in segments related to the alleged infringement.” In other words, “the idea that NPEs solely target firms that profitability infringe on NPEs’ intellectual property is inconsistent with our finding that cash holdings in related and unrelated operating segments are almost equally predictive of suit.” Defendants’ cash, not their profitable infringement, draws NPE lawsuits. This tendency to sue cash-rich defendants only appears in lawsuits brought by NPEs, the study found. Non-NPEs – small inventors and practicing entities – do not target cash-rich firms in their patent infringement actions (which suggests that these plaintiffs, unlike NPEs, are suing primarily to stop infringement). Similarly, plaintiffs in other types of lawsuits do not favor suits against cash-rich defendants. According to the paper, “cash is not a significant determinant of other (non-IP) forms of litigation—tort, contract, securities, environmental, or labor. This comparison suggests that our results on NPE litigation behavior do not just reflect general characteristics of litigation. Rather, our findings are consistent with agent-specific motivations for NPEs in targeting firms flush with cash.” The HBS paper found other evidence that NPEs sue opportunistically: NPEs are significantly more likely to sue firms that are already tied up with non-IP litigation and/or have unusually small legal teams. NPEs engage in far more forum shopping than do other plaintiffs bringing patent infringement suits. NPEs generally assert lower-quality patents – ones that are wordier, broader, and closer to expiration – and NPEs assert these patents more aggressively. All this indicates NPEs typically act as patent trolls. No Good Effects Supporters have argued that NPEs promote innovation, by licensing new technology to firms and by funneling licensing revenue to the inventors of the asserted patents, thus encouraging these inventors to engage in further R&D. The HBS paper, alas, only found evidence refuting these claims. Consider first the effect on firms buying licenses of NPE patents. Do these licensees become more innovative or productive? No, according to a 2015 study cited by the HBS paper. The 2015 study, by Professor Robin Feldman of University of California Hastings College of the Law and Professor Mark A. Lemley of Stanford Law School, found “that very few patent license demands actually lead to new innovation; most simply involve payment for the freedom to keep doing what the licensee was already doing. Surprisingly, this is true not only of NPE licenses but even of licenses from product-producing companies and universities.” If NPE licensing merely failed to promote innovation in licensees, that would be disappointing enough. But the HBS working paper provided worse news: When NPEs use litigation to pressure firms into buying licenses, such licensing actually harms the licensees’ innovation: “[W]e find evidence that firms losing to NPEs (either in court or through settlement) reduce their research and development investment by roughly 20% going forward, relative to ex ante identical firms. Thus, our evidence suggests that NPE litigation may lead to a real decrease in innovation at targeted firms.” Interestingly, the HBS paper found no such deleterious effect for patent infringement suits brought by practicing entities (whose primary revenue comes from selling goods and/or services): “[U]nlike firms that lose to NPEs, firms that lose to PEs [practicing entities] show no reduction in R&D investment.” NPEs supposedly promote innovation in another way: by providing significant financial support to the inventors of asserted patents, thus funding the inventors’ research and encouraging innovation. Alas, the HBS paper found no evidence that NPEs foster innovation in this manner. The paper examined changes in innovation outcomes in the technology areas where NPE litigation was most frequent – and found no observable increase in innovation by small innovators. Papers, Papers Of course the HBS paper has its limitations, like any economic study. “There are always methodological issues in these studies – such as the size and skew of the sample set,” said Prof. Jay P. Kesan, Director of the Program in Intellectual Property and Technology Law at University of Illinois College of Law. That is why the results of any single study should be viewed with a certain degree of skepticism. “If you see one paper, that is interesting. If you see three or papers, that is much more conclusive,” said Prof. James E. Bessen, Executive Director of the Technology & Policy Research Initiative at Boston University School of Law. It is therefore important to note that the HBS paper’s findings are in line with at least four other scholarly studies. For instance, an October 2018 paper [pdf], by Prof. Filippo Mezzanotti of Northwestern University’s Kellogg School of Management, found that patent litigation had a negative effect on R&D, particularly for small firms. A November 2018 paper by Prof. Sridhar Srinivasan, also of Northwestern University’s Kellogg School, found that R&D spending increased after the Supreme Court made it harder to obtain patent protection (thus cutting down on patent litigation). The Mezzanotti and Srinivasan papers examined all types of patent litigation, not just lawsuits filed by NPEs. But a third study suggested that NPE litigation was particularly harmful. This 2015 study examined the number of patent infringement suits filed in each district in the US and the amount of venture capital investment in those districts. It found that infringement suits brought by frequent patent litigators (a proxy for litigation by NPEs) was directly associated with decreased investment from venture capitalists. Infringement suits filed by other patentees did not decrease investment unless there was a particularly large amount of such litigation. Finally, a paper soon to be published in the Minnesota Law Journal examined whether NPEs’ patent assertions help to promote innovation. (An earlier draft of the paper, by Prof. Robin Feldman of University of California Hastings College of the Law and Prof. Mark A. Lemley of Stanford Law School is available here.) The paper found that: …NPE licensing demands almost never lead to innovation by the target firm. None of the indicia we would expect of real technology transfer were common in patent licensing demands. Moreover, NPE demands were particularly unlikely to be accompanied by the sharing of know-how or employees, the creation of joint ventures, or the development of new products. Bad Behavior All these studies on NPEs are beside the point, some experts assert. Instead of examining whether and to what extent certain patent owners are bad actors, it would be better to focus on bad behavior, regardless of the patentees’ identity. “The focus should be on curbing any kind of bad or opportunistic behavior, not on who is asserting a patent,” said Kesan. That position rests on an undeniable truth: NPEs are not the only patentees to assert their patents in ways that harm competition, innovation, and the economy. Brand name drug companies, for instance, have often abused the patent system in order to keep generic competitors off the market. So it makes perfect sense to study all the ways in which patentees can abuse the patent system for their own benefit – and society’s detriment. Yet according to many experts, focusing on NPEs is still worthwhile because these entities, on average, hurt innovation and the economy. The harm arises from the NPE form in general, stated Prof. Cohen. “Some are doing [harm] more than others,” he noted, but there was no evidence they provided any benefits. “We don’t see any positive results of NPEs, such as more innovation in NPE sectors,” he said. NPEs could thus present a distinct and significant threat to America’s innovation and economy. It certainly seems worthwhile to study whether that threat is real. Image Credits: Harvard Business School Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Related Steven Seidenberg may be reached at email@example.com."Do Patent Trolls Exist? Two Studies Reach Different Conclusions (Part 2)" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.