Patent Trolls Continue to Thwart Innovation

So-called “patent trolls” — companies with the sole aim of suing over patents — have been a scourge to big companies for years. Now a new study reveals that patent trolls harm startups as well as venture capitalists shy away from investing billions of dollars.

What’s the Latest?

You may be familiar with the term “patent troll,” a belittling moniker for a type of company dedicated solely to filing lawsuits over patents. Patent trolls are a scourge in the United States due to the country’s “American Rule,” which provides that each party in a lawsuit pays their own attorney’s fees. (The so-called “English Rule” dictates that the loser pays both sides’ fees. As you might imagine, patent trolls are less of a problem across the pond.) Lawsuits filed by patent trolls accusing infringement are most often settled outside of court for less than what a full trial would cost. The practice is essentially blackmail.

It’s one thing if a patent troll pecks away at AT&T or Apple. Those companies can survive minor parasites. But now we’ve learned that patent trolls are having negative effects on startups and venture capitalism:

A just-released study [PDF] by Catherine Tucker, a professor of marketing at MIT’s Sloan School of Business, finds that over the last five years, VC investment “would have likely been $21.772 billion higher… but for litigation brought by frequent litigators.”

What’s the Big Idea?

The results of the study are shocking, even to Tucker herself:

“You hear these anecdotes, of VCs being a little nervous [because of patent lawsuits],” she said. “But I didn’t think it would necessarily be strong enough to have an empirical effect.”

$21.772 billion could buy a lot of innovation. That’s the sort of money that can drive industries and give great ideas wings. But that money remains in the pockets of potential benefactors due to fear of patent trolls. When startups get sued — and even when the suits are thrown out — their values plummet and people tend to lose their jobs. This is such an obvious need-to-fix problem, you would think Congress would be falling over itself trying to get something done. But alas, true to its pervasive and unending ineptitude, debate over a patent reform bill stalled in the Senate last month.