Article Looks at Effects of NPE Patents on Innovation

Different entities use the patent system in different ways, depending on their respective business models. A recent paper, titled "Don’t Feed The Trolls?", written by economists John Johnson, Gregory K. Leonard, Christine Meyer and Ken Serwin, acknowledged this dynamic briefly and looked at the propriety of reforming the patent system to combat "trolling" or promoting other goals.

At the outset, the authors acknowledge that much of the discussion regarding patent reform has been couched in terms of "patent trolls asserting bad patents." Regarding the term "patent troll," the paper maintains that the definition of "troll" remains elusive:

The patent-holding company, the university, and the sole inventor are not the type of entities generally contemplated by those using the phrase “patent troll” in a derogatory manner. However, practically-speaking, it is quite difficult to craft a definition of “troll” that does not sweep other types of entities into its net.

On the "bad patents" part:

Definitions that focus on reliance on suspect patents as a critical trait of the patent troll, such as the definition proffered by the Congressional sub-committee, are also problematic. Determining the validity of a patent generally requires lengthy and expensive litigation. The patents of several so-called trolls have survived invalidity challenges relatively unscathed. Conversely, patents held by entities that produce a product that embodies a patented technology have been found to be invalid. On an ex ante basis, therefore,it is difficult to identify a patent troll. Even ex post, patent validity does not seem to be a good way of discerning trolls from “legitimate” holders of IP assets, since even firms who manufacture products embodying patented technology sometimes discover in litigation that their patents are invalid.

At least in one sense, non-practicing entities (NPE's) behavior has appeared to have increased the value of patents qua patents:

[P]atent trolls come in a variety of configurations. In most configurations, their behavior tends to increase the value of patents. The increase in value results, primarily, from increased liquidity in the market for the transfer of patent rights. The result of increased patent value is an increase in patenting activity.

Assets freely traded in liquid markets are worth more than identical assets traded in illiquid markets. Illiquidity increases the risk of holding the asset and buyers require a discount to compensate for that additional risk. The activities and behavior of patent trolls has led to increases in the frequency, visibility, and competitiveness of transfers of patent rights.

However, it is clear that, while patent trolls arguably have the effect of increasing inventive activity, their effect on development and commercialization activity are not so favorable.

Read more from the NERA economic consulting website, and view/download a copy of the paper here (link)