Patent troll, also known as non-practicing entity (NPE) or patent assertion entity (PAE), is a term used to describe people or companies that, as a business strategy, misuse patents that they own. Patent trolls themselves may not make any product or offer any service, but make money simply by asserting patent lawsuits against other businesses. Such NPEs keep looking for possibilities of their patent being used by someone fully, partially or even falsely. Patent trolls then demand monetary gains or threaten lawsuits on such target companies.

Patents constitute intellectual property (IP), and innovators holding patents are intellectual property owners (Related: Make Money On Your Intellectual Property). Patents promote entrepreneurial, innovative, and risky ventures with an uncertain potential of windfall returns. It’s the patent that leads to billion dollar business conflicts between the giants like Apple, Inc. (AAPL) and Samsung Group, and it’s the patent that ensures a monopoly over Viagra. Patent infringement cases and lawsuits indicate healthy, competitive, and dynamic business environment. However, excess lawsuits hurt competition, business, and the economy. (Related: Patent Wars And Their Effect On Your Wallet.)

Here are a few studies indicating the impact of patent trolls. Based on a study conducted on large-sized patent related datasets, a Harvard Business School Finance Working Paper, “Patent Trolls: Evidence from Targeted Firms,” suggests a few important findings:

  • The primary motive of patent trolls is to extract money opportunistically, instead of bringing any new, positive, or improved innovation.
  • NPEs target cash-rich businesses, with the sole aim of making money.
  • NPEs target firms that have profits arising from segments not directly related to patents.
  • NPEs target firms that are relatively weaker, including firms that are already in lawsuits (both IP and non-IP related), have small or no dedicated legal teams, and demonstrate high chances of monetary settlements.
  • The sample dataset included 484 IP lawsuits, of which only 35 were dismissed and the remaining 449 were lost/settled by targeted firms. This indicates a favorable ecosystem to patent trolls.
  • Compared to the firms that won against patent trolls, the targeted firms that lost a lawsuit reduced their R&D spending considerably, and produced significantly lesser number of patents. A decline in quality was also observed for the small number of patents that were produced after losing the lawsuit.

    Related studies suggest similar findings, including:

    • NPEs usually don’t innovate. Rather, they tend to capitalize on their owned patents, eventually blocking further advancements for that field, product, or technology. Firms that attempt to benefit by legally using the patented technology and advancing it further end up paying high royalty fees to the NPEs. This results in cost escalation passed on to then end consumer and defeats the purpose of innovation and healthy competition. For example, Aija Leiponen, an associate professor of technology and innovation strategy at Cornell University’s Dyson School of Applied Economics and Management, said “The royalty cost for patents held by equipment companies such as Nokia, Motorola Mobility, and Qualcomm is estimated to form about 13 percent of the price of a 3G wireless handset.”
    • A study from PricewaterhouseCoopers showed that more than two-thirds of patent lawsuits are filed by patent trolls – firms that don’t really do anything except for hoarding patents and making more money than the actual practicing firms. This results in an uneven playing field, which discourages open and healthy competition.
    • An MIT research study indicates that patent litigations lead to reduced venture capital funding and a decline in the creation of startups. It also results in an overall decline in business confidence and unfair market practices, which discourage entrepreneurs from taking risky ventures.
    • The practice of sending dodgy demand letters to target businesses is rampant. The impact of such practices remains unknown, but they lead to decline in motivation of target businesses.

    The Bottom Line

    Open, free and healthy competition leads to improved efficiencies, lower costs, innovative solutions, and improved business ecosystems that aid in overall economic growth. Patent trolls bank on legal complexities that work in their favor and against the innovative and competing businesses. The cost of first fighting and then losing a patent lawsuit is very high and often unaffordable for startups and small firms. Patent trolls are experts in filing lawsuits, which tilt the balance in their favor. Overall, patent trolls have a negative impact on the market. A fair legal system, offering a balanced approach to safeguard both patent holders and innovative competitors, is needed.