An article from Norwegian School of Economics (NHH)
Patent trolls can increase innovation
Companies that secure patent rights only in order to claim licence fees have a bad reputation. However, research shows that patent trolls can make it easier for small innovators to make money
Norwegian School of Economics (NHH)
Patent trolls, or non-practicing entities (NPE), get their name from a fairytale.
"A lawyer at Intel coined the name when the company was sued by a patent rights company. He compared the company with the troll who bursts out from under the bridge and demands payment from those who want to cross it," says researcher Steffen Juranek from the Department of Business and Management Science at NHH.
"He believed that patent trolls pop up in the same way to demand money for patents they have acquired" he says.
The troll in court
Together with Axel Haus of Goethe University Frankfurt, he has conducted research on the role of patent trolls in legal processes.
"In general, patent trolls have been considered very negative, but we have found that they can have a positive effect on innovation in the market," he says.
Patent trolls do not produce anything themselves, but make money buying large patent portfolios.
"They make money from companies that go bankrupt, or small innovators that work out of their garage. In the past, it was mainly a matter of software technology, where patent boundaries could be unclear, but today such companies work with several types of patent," says Juranek.
The company makes a living collecting licence fees from other companies. In 2002, patent trolls were the cause of more than half of all court cases in the USA regarding patents.
"The negative view towards patent trolls is based on their imposing an unexpected extra cost on companies. This means that NPEs can make innovation less lucrative because there is a risk of being sued when they begin to produce something new."
Help small players
When Juranek and Haus reviewed patent rights cases in the USA, they found that the expertise of patent trolls may have a positive impact on innovation in the market.
"We saw that 90 per cent of all cases end in a settlement. When a troll was involved, the court achieved resolution more quickly. Going to court against a patent troll is very challenging, and many players prefer a settlement in order to avoid an expensive court case. The patent troll thus makes the licence market more efficient."
It is easier for small innovators to make money from their work if they sell the patent to a specialized patent troll.
"Even though they hold the patent, it is not easy for a small player to collect money from a large company. By selling the patent to a troll, they are paid for their work, and being innovative becomes more lucrative for small actors. It is difficult for a little company to sue Apple, for example, while a troll has the expertise and resources required."
A clearer system in Europe
While patent trolls play a major role in the US patent system, they do not have much of a presence in Europe at present.
"This might be due to the differences in the legal systems. In Europe, companies must pay both their own and the counterparty's costs if they lose in court, while in the US they only have to pay their own costs. This makes it less risky to bring an action," says Juranek.
He also believes that the patent system in Europe is clearer, and therefore results in fewer legal disputes.
"There are many weak patents in the USA, and it can be unclear what the patent covers. This may make it worth testing the waters. Here in Europe, patents are subject to stricter requirements. A good patent system makes for clear patent boundaries, and means that conflicts are resolved more quickly."
- Axel Haus og Steffen Juranek: Patent Trolls, Litigation, and the Market for Innovation. SSRN New York, 2014.