Patent reform is on the agenda in the current Congress. The main objective of proposed reform is to stop unreasonable assertion of patents against businesses and individuals — that is, to shut down patent trolls.
We believe such reform is important to preserving the patent system’s role in innovation. We prefer that Congress enact the Senate-introduced PATENT Act (S. 1137). This will strongly complement Georgia’s law against bad-faith demand letters, which became effective July 1, 2014.
There has been a surge in patent litigation. Non-practicing entities (NPEs), firms that earn profits exclusively through “monetization” of patents via licensing or litigation, have driven the surge. They filed 67 percent of a record-high 5,518 U.S. patent infringement lawsuits in 2013, versus 28 percent of 2,491 lawsuits in 2009.
While NPEs are not new, they have never flourished at the scale seen today. These firms have been the most prone to behave as patent trolls.
Patent lawsuits cost firms money. The aggregate amount that publicly-traded U.S. firms lose from being sued for patent infringement exceeds the aggregate gain in profits from the patents that they own. NPE lawsuits make the difference. Without them, we find that profits from patents would exceed costs.
Georgia businesses have been hit especially hard. NPEs filed a total of 507 lawsuits against 189 Georgia companies between 2005 and the first half of 2014, with more than 75 percent of those lawsuits filed in the past five years.
A Suwanee-based telecommunications equipment company, ARRIS Group Inc., was sued 12 times the past decade. Many small businesseshave also been sued, including North Georgia Auto Brokers, a one-man used car dealership, and V-Tech Inc., a local construction firm.
Multiple studies have shown that NPEs win the lawsuits they initiate less often than practicing entities. This is because many NPEs behave as trolls and unreasonably assert their patents. Trolls can force defendants to spend money preparing a legal defense, giving them leverage in settlement negotiations. In many instances, it is less costly for a defendant to pay for a license than to contest a lawsuit, even when the defendant is certain to prevail!
Why is unreasonable assertion a bigger problem today? Information technology.
Computers and other electronic devices include many complementary inputs and are used in production in many different ways by many different firms. Think about how many retailers use barcode scanners, or how many coffee shops offer free Wi-fi. NPEs that own patents covering technology that complements other technology can, while never making a single product, claim royalties from a wide variety of manufacturing and end-using firms.
The Internet hasmade it easier for inventors to search for things to patent (without really innovating), and easier for inventors to search for parties to sue.
How will patent reform help? Like the new Georgia law regarding bad-faith demand letters, it punishes firms that make unreasonable patent assertions. But it goes farther in extending to federal court proceedings. The PATENT Act requires losing plaintiffs to pay defendants’ court costs whenever the case is deemed “objectively unreasonable.”
The Act would also make it less expensive to defend a patent lawsuit. It delays discovery to keep litigation costs down and allows technology manufacturers to represent end-users of the technology in litigation. A small business that uses barcode scanners in transactions may delay its own patent lawsuit over the scanners, while the case against the manufacturer of the scanners goes forward. Together, these mitigate the tactical advantages currently enjoyed by firms that over-assert patents.
Finally, these reforms will not harm firms that create real value through inventing technology, be they manufacturers or NPEs. Such firms will continue to be able to assert patents reasonably to earn rewards for their breakthroughs.
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Joseph Miller is a University of Georgia law professor. John Turner is an associate professor of economics at the University of Georgia. Jonathan Williams is an assistant professor of economics at the University of Georgia.