Patent lawsuits have become a big business. Over six times as many patent lawsuits are filed today as in 1980, and businesses of all sorts have become vocal about the burden of undeserved lawsuits, many over vague or overreaching software patents. The Supreme Court has weighed in with several decisions that limit some of the excesses, and the current administration has also called for change. Finally, Congress is considering adjustments to the patent litigation process that will help reduce litigation.
Is this necessary? The evidence suggests that it is, but even more should be done.
During the past five years, academic researchers have published more than two dozen empirical studies on patent litigation and its economic impacts. These studies have been conducted by researchers with diverse views and using different methodologies. The preponderant economic picture presented is that patent litigation now imposes substantial costs, particularly on small and innovative firms, and that these costs have tended overall to reduce research and development, venture capital investment and firm startups. Not one study of the economic impact of current patent litigation concludes that the effects are negligible.
[Other perspectives: Patent infringement is theft, plain and simple]
The number of defendants in patent lawsuits filed in 2009 was five times the annual number during the 1980s. By most tallies, the majority of lawsuits are now filed by so-called “patent assertion entities,” popularly known as “patent trolls.” Estimates based on surveys of Form 10-K filings and stock prices find that patent litigation has been costing firms tens of billions of dollars per year since 2007.
Startups and venture-backed firms, especially, report significant operational impacts from “PAE” lawsuits in survey-based studies. One analysis finds that the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit. Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment; another found that costly lawsuits caused publicly listed defendant firms to substantially curtail R&D spending. Yet further surveys find that lawsuits rarely have anything to do with technology transfer, and an analysis of 10-K filings finds that publicly listed patent assertion companies transfer very little of the money they collect to small inventors.
Although each of these studies has limitations and none is conclusive by itself, a consistent picture emerges: The patent system provides strong protection against excessive litigation in some sectors (such as pharmaceuticals), but substantial evidence highlights serious problems with patent litigation in many other industries.
Proposals now in Congress seek to address this problem with changes in litigation procedure. The reforms would require plaintiffs to specify exactly what products and features allegedly infringe their patents, to make it easier to recover costs for frivolous lawsuits and to limit expensive discovery costs until later in the trial. These steps all seem reasonable — they seem unlikely to place a significant burden on legitimate patent holders, and we expect they will help reduce unnecessary litigation.
But we think more is needed. The fundamental problem with our patent system is that it often fails as a property rights system; specifically, it fails to communicate boundary information. Patents would promote innovation more effectively if innovators had an easier time learning what existing patents might be used against them.
Currently, it is difficult for many innovators to determine whether earlier inventors own relevant patent rights to their products, and if so, who the owners are and what the patents cover. With better information about the existence, ownership and scope of patents, future innovators would be better able to avoid inadvertent infringement and the resulting patent lawsuits. Research shows that defendants in patent lawsuits are almost never copyists; the lack of transparency in our current system makes it is hard for innovators to design around the patents of others or negotiate a patent license in advance of development.
Congress should take steps to promote greater transparency in the patent system and mitigate the costs of patent litigation imposed on inadvertent infringers. This could be done by giving the Patent and Trademark Office more funding and more authority. The PTO should be directed to draft rules assuring that patents are examined more quickly and rigorously, patent scope is clearer and patent ownership is adequately disclosed. Finally, Congress should give courts discretion to reduce patent damages assessed against innocent infringers.
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