Three Boston University researchers have produced a rigorous empirical estimate of the cost of patent trolling. And the number is breath-taking: patent trolls ("non-practicing entity" is the clinical term) have cost publicly traded defendants $500 billion since 1990. And the problem has become most severe in recent years. In the last four years, the costs have averaged $83 billion per year. The study says this is more than a quarter of US industrial research and development spending during those years.
It's hard to measure the costs of litigation directly. The most obvious costs for defendants are legal fees and payouts to plaintiffs, but these are not necessarily the largest costs. Often, indirect costs like employee distraction, legal uncertainty, and the need to redesign or drop key products are even more significant.
The trio use a clever method known as a stock market event study to estimate these costs. The theory is simple: a company's stock price represents the stock market's best estimation of the company's value. If the company's stock drops by, say, two percent in the days after a lawsuit is filed, then the market thinks the lawsuit will cost the company two percent of its market capitalization.
Of course, this wouldn't be a very rigorous technique if they were looking at a single lawsuit. Any number of factors could have affected the firm's stock price that same week. Maybe the company released a bad earnings report the next day. But with a large sample of companies, these random factors should mostly cancel each other out, leaving the market's rough estimate of how much patent lawsuits cost their targets.
The authors used a database of 1,630 patent troll lawsuits compiled by Patent Freedom. Because many of the lawsuits had multiple defendants, there was a total of 4,114 plaintiff-defendant pairs. The median defendant over all of these pairs lost $20.4 million in market capitalization, while the mean loss was $122 million.
In their 2008 book, Bessen and Meurer showed that, outside the chemical and pharmaceutical industries, the cost of patent litigation had already begun to exceed the rewards to inventors by the year 2000. Their new work suggests that the problem has gotten much, much worse since then.
These results are important because the patent system is supposed to reward companies who invest in innovation. Yet thanks to the growing blizzard of frivolous patent lawsuits against technology companies, the patent system is actually becoming a net disincentive to innovation, especially software. We hope Congress and the Supreme Court are paying attention.[/p]
