The patent reform act didn’t go far enough

How much better off would Silicon Valley be with an additional $500 billion to invest in innovation, great products, and good-paying new jobs? I ask that question because a new study of patent litigation has finally put a number on the damage caused by patent trolls — those firms that collect patents, produce no products, and hunt for tech firms to sue over alleged patent infringements. It’s huge: $500 billion since 1990. The problem has become most severe in recent years. Between 2007 and 2010, the cost has averaged $83 billion per year.

To put the damage in perspective, $83 billion is more than a quarter of annual R&D spending by all industries in the United States, the authors note. Moreover, because this total is only for publicly listed firms, it likely understates the true loss of wealth resulting from patent trolls’ lawsuits.

[ The IT economy vs. the rest of the economy: Count yourself lucky to work in tech, at least for now. But with no light at the end of the economic tunnel, it pays to keep your skills sharp. | Keep up with the key tech news and analysis with the InfoWorld Daily newsletter. ]

If you think the patent reform act signed last week by President Barack Obama will end the madness, an author of the study says you’re wrong: “It does not get to the root of the problem,” says James Bessen, an economist at the Boston University School of Law.

Bessen and co-authors Jennifer Ford and Michael J. Meurer, all of Boston University, used a database of 1,630 lawsuits by nonpracticing entities (NPEs) — the polite term for patent trolls — and looked at how much the stock price of the companies that were sued dipped after the lawsuit was filed. The average loss in market capitalization of a company being sued was about $122 million.

But don’t companies then regain value after the suits are settled? On average, they do not, says Bessen. The market typically prices in the cost of a settlement when a suit is filed. If the settlement is more or less in line with those expectations, the stock doesn’t move very much on the settlement news.

In theory, patent lawsuits are supposed to protect inventors from having their ideas stolen. But that’s not the case. The researchers looked at 14 litigants that had caused companies to lose about $87.6 billion in value. Very little of that lost wealth — only about $7.6 billion — actually accrued to the true inventors of the patented technology.

The database was assembled by Patent Freedom, an organization devoted to researching and providing information on NPE behavior and activities. It defines NPEs as companies that “do not practice their inventions in products or service, or otherwise derive a substantial portion of their revenues from the sale of products and services in the marketplace. Instead, NPEs seek to derive the majority of their income from the enforcement of patent rights.”

Software is the target The study found that about 62 percent of the troll suits targeted software patents.

A software patent, says Bessen, is four times more likely to be targeted than a patent on a chemical. “The definition of something like [the drug] Lipitor is clear, but in software we see a lot of abstractions,” he said in an interview.

Because there are so many software-related patents, it can be difficult for a company to know when its work might attract the attention of a troll. “The scope of these patents is not clear, they are often written in vague language, and technology companies cannot easily find them and understand what they claim. It appears that much of the NPE litigation takes advantages of these weaknesses,” the paper states.

Hoping to shore up the process and end the logjam of pending patents, Congress, after years of discussion, finally enacted the America Invents Act, the first major change in patent law since the 1950s. On the plus side, it allows the overburdened U.S. Patent and Trademark Office (USPTO) to see fees for patents, which should help in hiring enough people to whittle down a backlog of 700,000 patent applications.

It would also allow third parties to file a challenge to a patent within nine months of it being awarded. The new process for challenging patents will weed out ones that the USPTO shouldn’t have granted in the first place, supporters said.

Very significantly, the new law ends the practice of suing multiple defendants for violating a single patent. Although it might seem that defendants do better when they can band together with other defendants, in practice they wind up paying more in legal costs. The trolls, in turn, tend to get a larger total settlement, even though the individual defendants may each pay less, says Brad Pedersen, an attorney specializing in patent law at the Patterson Thuente IP firm.

Why the new patent law doesn’t solve the problem Pedersen, who often represents startups, believes the new law will have a significant impact on trolls. Indeed, in the days immediately before the law actually went into effect, patent suits against multiple defendants spiked, as potential litigants realized they were almost out of time to sue. Overall, he says, the new law will do much to reduce troll-inspired lawsuits.

But Boston University’s Bessen disagrees, noting that the law leaves untouched a favorite weapon of the trolls: a tactic known as a continuation. Simply put, a continuation is an open patent application, often filed after an initial application by a troll is rejected. Once a legitimate company develops a process or application related to the continued patent, the troll then modifies its application to cover what the legitimate inventor has done.

The law also does not undo years of legal precedent that allows the filing of vague and overly broad patents, Bessen says. “In trying to make world safer for [inventors], the federal courts have relaxed rules and allowed patents on abstract ideas, making boundaries unclear, which leads to litigation.”

There’s nothing in the law that will put a stop to the debilitating patent fight that has turned into a war of everyone against everyone in the wireless industry.

Flawed as it was, the America Invents Act was a start. But it has to go further. Until the law is strengthened, patent trolls will continue to damage the economy and suck the life out of innovative companies.

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill.snyder@sbcglobal.net. Follow me on Twitter at BSnyderSF.

This article, “The patent reform act didn’t go far enough,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.