Patent Failure Costs US$500 billion (1990-2011)

Source: Ars Technica, Sep 2011

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.

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the authors conclude that since the 1990s it is only in the chemical and pharmaceutical industries that the benefits of patent ownership clearly outweigh the costs (p. 140)

the pattern of litigation costs across technologies is consistent with differences in patent notice. Litigation costs are particularly low for patents on chemical compounds, including pharmaceuticals. At the same time, the value of these patents is much higher than the value of other patents—perhaps, in part, because litigation costs are low and enforcement is effective. Economists have long recognized that patents on chemicals work particularly well because these patents have very well-defined boundaries.
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Software patents, in particular, often have boundaries that are especially difficult to determine, for reasons we explore further in chapter 9. Software patents have even higher litigation rates and a high frequency of appeals over the meaning of patent claims. Not surprisingly, the costs of litigation for software patents far exceed the profits. The distinctive pattern of litigation rates across technologies thus supports the notion that patent notice might explain differences in patent value.

The deterioration of patent notice might also be roughly associated with a decline in patent quality, broadly conceived. Many critics equate low patent quality with frequent issuance of invalid patents. These critics contend that poor examination allows invalid patents to be issued for inventions that are obvious or lack novelty. Specifically, they assert that inadequate search of previous patents and publications causes examiners to overlook novelty and obviousness problems.

The Notice Function: If You Can’t Tell the Boundaries, It Ain’t Property

We can identify one very important difference between the way property rights and patent rights are implemented. This difference concerns the “notice function” of property. An efficient property system notifies non-owners of property boundaries. For example, land rights have a well-developed and efficient system to notify third parties of boundaries. Because of this, only rarely does someone invest millions of dollars constructing a building that encroaches on someone else’s land without permission.

Far more typically, would-be investors “clear” the necessary rights before investing. They locate markers, check land deeds, conduct surveys, and so forth, in order to determine the adjacent boundaries. They then either negotiate rights to the needed land or design the building to avoid encroachment.

The notice function does not always work so well with patents. For example, the E-Data dispute arose because hundreds of parties, including some very large companies, ignored, did not see, or misunderstood the boundaries created by the patent in question. That patent, awarded to Charles Freeny Jr., was entitled a “System for Reproducing Information in Material Objects at a Point of Sale Location.” Its unhelpful title obscures the fact that Freeny actually invented a kiosk for producing music tapes or other products in retail stores using digital information. But, as we have seen, the patent was asserted against thousands of companies doing e-commerce, a rather different technology.

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