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Manhattan Institute

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Trial Lawyers, Inc.: Patent Trolls — A Report on the Litigation Industry's Intellectual Property Line of Business

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Trial Lawyers, Inc.: Patent Trolls — A Report on the Litigation Industry's Intellectual Property Line of Business

July 15, 2013
Legal ReformCivil Justice

The framers of the United States Constitution considered the ability of inventors to protect and exploit their discoveries to be so essential to future prosperity that they included the ability to issue patents among the few enumerated legislative powers granted to the federal government.[1] Of late, however, litigation over software patents has became a drag, not a boon, to technological innovation: in 2011, Google and Apple spent more on patent litigation and acquisition than on research and development.[2] Unlike pharmaceutical patents—which defray massive government-required safety and efficacy trials and are limited to easy-to-define, specific chemical compounds—software patents are hard to define, enabling aggressive plaintiffs’ lawyers exploiting the maze of U.S. legal rules to extract wealth from the nation’s most innovative companies. And “patent trolls”—companies that produce no goods or services but own and seek to enforce patent rights against businesses that are producing goods or services using related technologies (see box, “What Is a ‘Patent Troll’?”)—have begun to target Main Street companies, sending through their lawyers patent-infringement “demand letters” to everything from coffee shops offering wireless service to their customers to small businesses using scanner technologies on their purchased printers.[3]

WHAT IS A “PATENT TROLL”?

The intentionally pejorative term “patent troll” was popularized in 2001 by Peter Detkin, then vice president and associate general counsel at Intel.[4] It is commonly used to describe “non-practicing entities” (NPEs), patent holders who do not use their patent for invention, innovation, or production of a product but rather only license patents or sue for their enforcement.[5] Because NPEs can sometimes include individual investors, start-up ventures, and universities, critics of patent trolling have gravitated toward the narrower term “patent assertion entities” (PAEs),[6] companies that exist in whole or significant part to generate revenues from patent enforcementwhich now number in the hundreds,[7] including at least 16 public companies.[8] Ironically, Detkin himself is now the managing partner and significant owner of what is perhaps the largest PAE, Intellectual Ventures, which has amassed between 30,000 and 60,000 patents over the past five years.[9]

Thus, patent trolling has emerged as a big and growing business line for what the Manhattan Institute has dubbed Trial Lawyers, Inc.,[10] the subset of the plaintiffs’ bar that behaves like the biggest of big businesses (with the exception that instead of selling products to willing consumers, the lawyers extract monies from unwilling defendants through their unique access to the courts). The cost to consumers is significant: according to a study by Boston University law professors Mike Meurer and Jim Bessen, the “patent tax” adds 20 percent to software and electronic research and development costs, with the direct costs of litigation by NPEs in 2011 totaling $29 billion—up from only $7 billion in 2005.[11] (Factoring in indirect costs, the authors estimated an annual cost of $80 billion.)[12] The number of patent lawsuits filed by PAEs grew from 466 in 2006 to 2,914 in 2012, an increase of 526 percent in just six years (see chart, “Number of Patent Lawsuits, by Plaintiff”).[13] In 2011, 2,150 companies were forced to mount 5,842 defenses against NPE-initiated patent lawsuits—up from only 1,401 defenses in 2005.[14]

In response to patent-trolling abuse, judges, business leaders, and politicians have responded with a bevy of proposals. Seventh Circuit Judge Richard Posner, the most-cited jurist on the federal courts of appeals,[15] has proposed shortening software patent terms to five years.[16] Software entrepreneur Mark Cuban, billionaire founder of Broadcast.com, has suggested eliminating software patents altogether.[17] In a June policy announcement,[18] following up on a February speech decrying lawsuit abuse by patent trolls,[19] President Obama proposed seven legislative reforms and five executive actions designed to ameliorate the problem. The president’s proposals follow on the heels of at least five bills in Congress addressing patent-trolling litigation[20] and a 2011 enacted reform, the Leahy-Smith America Invents Act,[21] which was touted as “the most significant reform of the U.S. patent system since 1836.”[22] The rest of this report will discuss these proposals, after describing the factors leading to the rise of patent-troll litigation abuse.

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